PSPRS private equity investments outperform critical industry benchmarks

March 29, 2018

Contact: Christian Palmer
Phone: 602-296-3736

PSPRS private equity investments outperform critical industry benchmarks
10-year returns surpass bull market and peer fund gains, says consultant

One of the most important changes to PSPRS in the recent past has been the system’s improved investment strategy, which has increased the diversity of the system’s portfolio and reduced its level of investment risk. Instituting this new strategy didn’t simply require a change in approach – it also required the Arizona Legislature to change state law in 2008 to allow PSPRS to invest in a broader mix of investments, including private equity funds.

Financial returns indicate that this new strategy has had positive results for the system. PSPRS earned more than $1 billion in profit last fiscal year after posting an 11.85 percent return net of fees, helping to set the system back on the path toward recovery.

Now PSPRS has another positive indicator reaffirming its diversified strategy – the performance of PSPRS’s investments in private equity, an asset class that consists of long-term investments in privately held companies.

Currently, PSPRS has committed about $2.2 billion to private equity investments out of the fund’s total value of about $10 billion.

How are those investments doing?

The Institutional Limited Partners Association (ILPA) is a trade association for retirement systems like PSPRS which hold private equity investments. ILPA has about 450 member institutions which together hold more than $1 trillion of private equity assets. The ILPA sets a benchmark for such assets over certain time periods – 3 years, 5 years and 10 years.

PSPRS private equity performance vs. industry benchmarks 3-year 5-year 10-year
PSPRS private equity 13.6% 15.4% 13.1%
ILPA Private Markets Benchmark 10.0% 12.7% 8.8%
Overperformance         3.6% 2.7% 4.3%

With a 10-year return of 13.1 percent, PSPRS’s private equity investments have outperformed the ILPA benchmark over that time by more than 4 percent. These investments have produced more than $1.5 billion in distributions back to PSPRS, which also still stands to benefit from $1.3 billion in unrealized private equity value.

On Wednesday, March 28, the PSPRS Board of Trustees heard from a representative of StepStone consulting, which advises public pensions and private endowments on private investment markets. The consulting group found that PSPRS had the second-highest private equity investment return among more than 40 peer pensions over a 10-year time period ending September 30, 2017.

“Within a relatively short timeframe, PSPRS has built a private equity portfolio that is outperforming one of the strongest bull markets in recent history,” said StepStone partner Jay Rose. “This is a significant investment achievement for a pension that is also outperforming almost all peer pensions with older and more established private equity portfolios.”

It will take time for the pension to return to full funding, just as it took unprecedented back-to-back market crashes last decade to create the system’s present challenges. Still, the PSPRS investment strategy coupled with the critical reforms passed in 2016 by Arizona voters have created a solid foundation for recovery.

“Ten years ago we set out to lower our investment risk to protect the pension,” said PSPRS Board Chairman Brian Tobin. “Private equity plays a huge part in our strategy and the progress we are seeing can be considered great news for members, employers and taxpayers.”

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